What margins? The AI business model is changing rapidly, says Cohere founder
OpenAI and Anthropic spend billions of dollars annually training models like GPT-4 and Claude, but price gouging makes the business around these platforms quite precarious. Aidan Gomez, CEO of rival AI provider Cohere, says in a podcast appearance on Monday that selling access to models is quickly becoming a “zero-margin business.” Currently, these AI models cost more than they bring in.
“If you’re just selling models anytime soon, it’s going to be a really tricky game,” Gomez said in an interview with 20VC’s Harry Stebbings. By “selling models,” he means selling API access to those AI models; OpenAI, Anthropic, Google and Cohere offer this service to developers and they all face a similar problem.
“It’s going to be a zero-margin business because there’s so much price dumping. People are giving the model away for free. It’s still going to be big business, it’s still going to be pretty high numbers because people need this technology – it’s growing very quickly – but the margins are going to be very tight, at least for now.”
Companies developing cutting-edge AI models are in fierce competition with each other. The most reliable strategy for improving AI models today is to add more processing power, which means writing big checks to Nvidia for the hardware needed to make AI models a bit smarter. At the same time, there’s a race to the bottom. OpenAI and Google have dramatically reduced the prices of access to their AI models to retain users – while Meta’s open-source models can simply be licensed for free.
“That’s why there’s so much excitement at the application level,” Gomez said, pointing to OpenAI’s $20-a-month ChatGPT subscription. Gomez says Cohere’s AI models will be an attractive business in the long term, but until then, the products could be a meaningful way to generate revenue.
In other words, today’s AI models are losing money – and a lot of it. While Microsoft and Google can subsidize or simply absorb these losses, startups usually can’t. Cohere is one of the last remaining startups developing groundbreaking AI models, along with OpenAI, Anthropic and Mistral. Other startups like them – Inflection, Adept, Character.ai – were acquired by large cloud providers, leaving behind an unprofitable business model shell while retaining their powerful technology.
However, the big technology companies are basically eating these new companies alive before they have a chance to become competitors.
“It’s really dangerous when you make yourself a subsidiary of your cloud provider,” Gomez said, noting that venture capitalists only want a nice return, while cloud providers may want more. “It’s just not good business.”
Companies developing cutting-edge AI models are finding themselves in an increasingly difficult position. There is speculation that innovations in model architecture, data efficiency, or computational power will one day bring huge gains to these AI models. However, there is no telling when or if that day will come. And obviously not every AI startup of today will be there.
